Marin Real Estate Pulse

REO House

March 10, 2008

REO is a real estate term which means “real estate owned”.  The real estate is owned by bank or lender, typically as a result of foreclosure.  When a bank lends you money to purchase a house, the home is collateral for the loan which means if you don’t make your payments the bank has the right to take ownership of the property.  Mind you, this is not property the bank wanted or wants to keep, it is a drag on their balance sheet and ties up money that could be used for other loans.

Once a bank owns the home they want to sell it a quickly as possible.  This does not mean a fire sale but often the prices are slightly under market price.  The banks will use a professional appraiser and a couple of real estate brokers to help determine market price.  The bank is not legally required to complete the usual disclosure documents because typically they don’t have enough information, though they still must disclose what they do know.  For buyer’s this means the home is purchase “as is” so it is especially important to get good inspections.

March 10, 2008

Short Sales are relativity new to the real estate/banking world.   What is a short sale and how do they affect buyer’s, seller’s, and banks.  Simply put a short sale is where a home sells for less money than the seller owes the bank and/or private lender.

For example, if you owe $500,000 on a house but it sells for $350,000 you are short $150,000 of the amount needed to pay off your loans.  Usually, because of commission, taxes, late payments, and expense the “short” amount might add up to another eight or ten percent, in this example the seller might be short $190,000.  What happens now, doesn’t the bank still want all their money?  Of course they want all their money but what are they to do if the seller does not have any money and the house value has declined?  What they do is eat the difference, the short amount. 

The bank will usually forgive the borrower the short amount and write it off as a loss.  They made a bad business decision and have to pay for it.  Usually they lent the buyer %100 of the money needed to purchase the home, and often without supporting documentation on the buyer’s income or assists.  It is called loose underwriting and those days are over.  It really was a dumb idea; when you think about it, even if the value of the home remained stable the bank would have expenses if they took back the home to sell.  In a declining market it just makes it that much worse.  Is this predatory lending, yes in many examples it is.  Did the buyer’s lie on their loan application?  Sometimes they did but other times the mortgage broker filled in the numbers.  Did the buyer’s know their interest rate was going to jump in a few years?  Many did but maybe he was not given all the information up front.

Okay, so we learned the bank eats the lost money but what happens to the buyer?  In the vast majority of cases the buyer does not owe the bank any of the shortfall, however, in most cases the buyer has a bad credit score as a result of the short sale.  Better than a foreclosure but bad none the less. 

Prior to a new law moving its way through the system (I think it is finally in effect - consult with your accountant for details) buyer’s that shorted a bank on a sale would owe tax to the IRS and state on the amount of money forgiven.  In the example above the buyer would have owed income tax on an additional $190,000 of income. 

Warren Carreiro, Broker